With $130M of bitcoin wealth and plans to sell, the FBI could rattle the virtual currency cage

Like any marketplace, the value of bitcoin is driven in large part by supply and demand. New bitcoin is added to the system at a mathematically controlled rate, but buying and selling activity varies wildly with overall market sentiment, increasing global awareness, and external factors like changing governmental regulations. When there’s more buyers than sellers, the price goes up. The inverse, of course, is also true.

Given this dynamic, theres a potentially massive disruption in bitcoin’s near- to mid-term future: The FBI liquidating its stash of nearly 174,000 bitcoins, which is valued at $130.3 million at today’s exchange rate of $749.

The feds acquired these bitcoins during their raid and shuttering of online black market Silk Road and currently hold them in the first- and thirty-seventh-largest bitcoin wallet accounts in the world. Silk Road’s alleged founder Ross Ulbricht is thought to have pocketed 600,000 bitcoins over the three-year life of his business, many of which are thought to be hidden in unknown wallet accounts. This means that the FBI’s bitcoin stash could conceivably grow even larger, should it uncover these hidden assets.

Immediately following the Silk Road raid, when the FBI had thus far claimed just 26,000 bitcoins, a Bureau spokesperson told Forbes, “We will hold [the bitcoin] until after the judicial process is over. This is kind of new to us. We will probably just liquidate them.”

Whoa! This would amount to an incredible flood of selling activity.

Although trading activity fluctuates wildly over time, the bitcoin market has averaged approximately 200,000 BTC of trading volume and 50,000 individual bitcoin transactions per day over the last 12 months – trading volume fell to a 12-month low of less than 100,000 BTC and transactions to a 60-day low of barely 40,000 over the last week, presumably due to holiday season. Measured in US dollars, this trading volume currently represents just $70 million USD.

In other words, there is a strong chance that the FBI will at some point look to unload in the neighborhood of two days worth of trading volume for this one asset, or measured another way, nearly 1.5 percent of all bitcoins in existence. For a basis of comparison, we can look to trading activity in Apple stock. Over the last three months, Apple has averaged 11.2 million shares traded per day. If someone were to rapidly unload twice that daily volume, or 2.4 percent of all Apple shares outstanding (valued at$12.5 billion), it would send shockwaves through the market. The same is true for bitcoin.

A look at a list of the largest recent bitcoin transactions compiled by Blockchain.info shows that transactions of even 1,000 bitcions in size are exceedingly rare. Even if the FBI spread its selling activity over an extended period of time, it would need to be exceptionally cautious not to spook the market and destroy the value of its seized virtual assets. Even if the FBI arranged a private transaction (or multiple), rather than going through a public exchange like BitStamp or Mt. Gox (currently, the two largest by USD volume), these transactions would be recorded in the blockchain, or bitcoin’s version of a global general ledger, and thus widely known to the broader market.

The FBI isn’t the only large holder of bitcoins. The virtual currency’s anonymous creator(s), known only by the pseudonym Satoshi Nakamoto, is believed to hold as many as 1 million bitcoins across thousands of wallet accounts, although few have ever moved since being mined.

As recently as November, the Winklevoss brothers claimed to hold approximately 1 percent of all bitcoins in circulation, putting their stash at between 100,000 to 150,000. The early bitcoin believers first revealed the size of their holdings to the New York Times in April when bitcoin was trading at just $120, placing its value at $11 million at the time. However, it is thought that they acquired most of these bitcoins far earlier when the currency was trading at less than $50.

Unlike the FBI, the address(s) of the Winklevoss’ bitcoin wealth is unknown. Presumably, they hold their bitcoin in several wallets – the FBI’s concentration is rare among virtual currency moguls – making it even more difficult to track.

Since November, Bitcoin has skyrocketed as high as $1,240, fallen as low as $422, and now hovers around $750. It’s unknown whether the Winklevosses have liquidated any of their holdings since their last public statement, but it’s a sure bet that they still hold the majority of this wealth in bitcoins given the difficulty of finding nearly $100 million worth of liquidity without taking its value.

The Winklevosses aren’t just holders of bitcoin. They are also investors in the startup ecosystem surrounding the virtual currency and founders of an exchange traded bitcoin trust. This level of commitment to the bitcoin makes it unlikely that they’d take actions to significantly harm the broader ecosystem. It’s hard to have the same level of confidence around the FBI, which self-admittedly is “new” to bitcoin.

One day, the FBI and potentially other bitcoin titans will look to unload meaningful portions of their digital wealth. The consequences of such selling are impossible to predict, but it will be unlike anything the market has ever seen. If bitcoin adoption becomes sufficiently widespread that it can be seamlessly used to buy real estate, stocks, and other high value assets then there may no longer be a need to convert it into dollars or another fiat currency before completing such transactions. In the FBI’s case, however, diversifying into other illiquid assets is presumably not the goal.

Bitcoin bulls should keep an eye on these holders of massive bitcoin wealth. Fortunately, the location of the FBI accounts is widely known and the fact that its plans and motivations are known may mitigate some of the potential negative effects of such a massive liquidation.

For the bitcoin ecosystem, the FBI may be “the devil you know,” but once it commences selling, it will be a devil, nonetheless.